With the world's suckers investors (CEOs, politicians, and peons alike) all hanging on every word the man-behind-the-curtain has to say on Friday, Stone & McCarthy has crafted an excellent 'what-if' of key takeaways and interpretations ahead of Friday's Jackson Hole Symposium speech by Bernanke. Will Draghi toe the line? Will China be pissed? and what rhymes with J-Hole?
Via Stone & McCarthy Research Associates
Key Takeaways:
1. We expect Bernanke will reiterate the Fed's options for providing further stimulus, and its willingness to act "as needed", but not signal any specific policy action or its timing due to proximity to the September 12-13 FOMC meeting.
2. The case for further stimulus may have weakened since the July 31-August 1 FOMC meeting due to somewhat better economic data, especially for housing. It could be further reduced if the Beige Book does not suggest any substantive deterioration in conditions, and/or the August employment report shows job creation remains about on trend.
Fed Chairman Ben Bernanke will deliver the keynote speech at the Kansas City Fed's annual symposium at Jackson Hole, WY. He speaks at 10:00 ET, and his topic will be "Monetary Policy Since the Crisis." He has covered this subject before. His comments will probably offer a few updates since the last time he spoke on a similar theme. Since that time the FOMC has continued its Maturity Extension Program with an additional $267 billion in sales of shorter-term Treasurys and buys of longer-term Treasury notes and bonds. The FOMC has held two more meetings at which communications policy has been thoroughly discussed.
Markets are anticipating that Bernanke will give an indication of more stimulus -- the focus is for a third round of large-scale asset purchases or so-called "QE3" -- as he did back on August 27, 2010 when the second Large-Scale Asset Purchase (LSAP) program was signaled. However, at that time the next FOMC meeting was over three weeks distant from the speech, and the FOMC was not scheduled to update its forecast until eight weeks later at the November 3 meeting.
This year, the FOMC meeting is a scant two weeks away and will include an update to the Fed's collective expectations for the economy. The Committee already upped the anticipation for more easing with its August 1 statement that switched to "as needed" from the "if appropriate" language of the June 20 statement. The change was consistent with FOMC statements during the period of the financial crisis in late 2008 and early 2009, and conveys the heightened sense of urgency regarding possible policy actions. The Chairman may not feel the need to re-do the Committee's work in this regard.
If Bernanke wants to de-emphasize the importance of his individual remarks, and elevate the collective nature of the decision-making, his Jackson Hole remarks could serve that purpose by directing attention to the next FOMC meeting. We also note that Bernanke and Vice Chair Janet Yellen have commented on several occasions that while a great deal of preparation goes into the FOMC meeting in terms of possible wordings for the statement and analysis of forecasts for the Districts and nation, no decision is final until the end of the meeting.
Between now and the start of the deliberations on September 12, the FOMC will get two closely-watched reports on the economy: the Beige Book at 14:00 ET on Wednesday, August 29, and the August employment data at 8:30 ET on Friday, September 7. If these show no substantive deterioration, the FOMC may opt to wait until there is a clearer case for more easing. After all, the MEP is still in place and will run through the end of 2012.
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The other critical factor will be conditions in the eurozone, and the headwinds posed by market volatility associated with the sovereign debt crisis and economic recession. Should the situation in the global economy be more stable, there will be less reason for Bernanke to signal imminent action.
Bernanke is likely to reiterate the options the Fed has in providing more easing, and these are should follow along the lines mentioned in the July 31-August FOMC meeting minutes. We expect the Chairman will be anxious to allay any concerns that the Fed lacks the tools to provide more accommodation. In particular, he may reinforce that the Fed staff projections indicate that there is "substantial capacity" in the market for another large-scale asset purchase program without causing disruptions.
We will be curious if the references to exploring the Bank of England's "Funding for Lending Scheme" for "possible programs aimed at encouraging bank lending to households and firms" has resulted in any elevation of this option in the hierarchy of possible tools to be used. If it has, Bernanke could highlight it to reassure that the Fed does have options, and remains fully engaged in finding the right ones to address current economic conditions.
On balance, we think Bernanke will save the policy directives for the FOMC meeting while highlighting that the Committee is vigilant and flexible, and ready to act.